Renter Nation: The Rise of Multifamily Housing

By choice and by necessity, Americans will continue to escalate the demand for rental housing in the years ahead --creating opportunities in professionally-managed properties across formats, generations, and geographies.

More and more, the U.S. is a nation of renters

The U.S. rental housing market has seen a significant run-up in demand. Over the past decade, occupied apartment units rose by 20% above the prior ten-year period.1

A major and unprecedented structural shift has occurred due to a variety of demographic and socioeconomic factors. Real estate investment managers’ allocations to institutional-quality multifamily product have risen given the ongoing strength in property fundamentals. The sector is viewed as having a steady income stream with rents that adjust with inflation annually. In the coming years, the current conditions will offer new opportunities in professionally-managed rental housing across different formats, generations, and geographies. Clarion Partners believes that renters, both by choice and by necessity, will continue to escalate the demand for rental housing.

Favorable demographic and sociographic conditions

All forms of U.S. housing report low availability and high pricing amid a strengthening economy and rising household formation. Over the next decade, the U.S. is poised to add over 10 million new households, which will benefit both owner and renter occupied housing.2 A range of housing options in diverse settings will be needed to accommodate households of varying ages and incomes.

The recent expansion of the multifamily market has been driven by renter households across the six largest living American generations. In 2018, total housing units (or households) reached 120 million — about 77 million owner and 43 million renter households (now approximately 65% and 35%).3 Today the homeownership rate across all ages is near historic lows. In the future, for-sale housing may make a greater recovery; however, a full return to the prior peak homeownership rate is not anticipated.

Recent and Future Renter Household Formation: In the past ten years, the number of new renter households rose by nearly 10 million, significantly outpacing the owner segment, which reported minimal growth. We expect steady growth in renter households to continue in the future. Industry estimates anticipate another 500,000 new rental households per annum through 2025.4

Changing Lifestyles: Over the past decade, the single population rose by a whopping 15 million, now above married individuals. The shift in independent living is attributed to lifestyle changes in both younger and older American households. More young adults are postponing marriage, while older adults divorce more frequently.4 All have led to a rise in apartment living, generally a more manageable expense and flexible living arrangement than a single-family home.

Today the cost of living is one of the most significant challenges facing many cities across the nation. As U.S. housing prices have surged, wealth and income gains have been modest for most. These combined circumstances have led to the recent surge in rental housing demand.6 Nationwide, it is now cheaper to rent than buy in more than half of all counties.7

Prices in Top Employment Hubs

For-Sale Housing. The accleration in for-sale housing appreciation is pronounced in the top U.S. employment hubs with a high concentration of office-using jobs. Over the long term, a well-paid and educated workforce has generally been linked to expensive real estate. Outsized pricing gains have been reported in San Francisco, Los Angeles, New York, Seattle, and Boston, where there are nodes centered around thriving industries. Over the past ten years, the affordability of buying a home has worsened for many Americans, as home prices have appreciated much faster than inflation and mortgage rates have risen to a seven-year high.

Rental Housing. Currently, 24% of U.S. renter households (about 20 million) spend more than 50% of annual income on housing.8 Across some U.S. cities, rent-to-income ratios are well above the U.S. average. The Department of Housing and Urban Development (HUD) identifies households spending over 30% of income on housing as cost burdened.3

Large Generational Financial & Wealth Accumulation Differences. The primary renter base is largely young adults. This group holds the smallest share of American net worth and has seen income growth fall significantly short of apartment rent escalations over the past decade. Consequently, the wealth disparity by age has widened, and the financial demands of homeownership (e.g. saving for down payment) are out of reach for many, so much so that about 30% of millennials (24 million) currently live with family.9 Furthermore, the wealth accumulation model may be changing. In the past, Americans’ net worth was largely concentrated in property ownership; now many young adults hold a large share of wealth in defined contribution (DC) plans, which may make buying a house a less important life milestone.

Student Record Student Debt a Huge Challenge for First-Time Homeowners. Student loan debt is a unique problem to the U.S. and, in particular, the Millennial generation, now standing at $1.5 trillion. The average student loan debt for the Class of 2017 was $39,400, up 6% year-over-year. Today the average net worth of younger millennials is negative. A home mortgage requires top-tier credit and conservative debt-to-income ratios. The current system for rating credit and qualifying for a home loan may continue to be restrictive. Consequently, first-time buyers now represent only 30% of all sales, down from the long-term average of 39%.7

U.S. Student Loan Debt Outstanding (Trillions)

Source: New York Fed Consumer Credit Panel/Equifax, Q3 2018.

Rental housing: demand outpaces supply

In this real estate cycle, total absorption has outpaced overall completions. The sharp expansion of new rental housing has been met with high ongoing demand (Figure 7). Across the entire rental housing universe (totaling approximately 43 million units), there are 28.9 million multi-unit apartments and 13.2 million single-family homes.3 Institutional-quality multi-unit rentals represent only 15 million total rental units.10 Professionally-managed multifamily is still a relatively small share of overall inventory. Clarion Partners believes that there is still a scalable opportunity in institutional-quality housing investment.

Recent growth in rental stock has been most pronounced in the Class A and single-family segments.

Class A Boom in Big Cities. Rentership rates and multifamily as a percentage of all housing are generally highest in New York City, Los Angeles, Washington, D.C., San Francisco, and Dallas. In the past decade, millions of high-quality Class A rental units have delivered in the biggest U.S. cities. Much of this new inventory has targeted higher-income professionals and is located in high-rise buildings in downtowns or urban neighborhoods. Today just under half of all renter households reside in principal cities — the main core of metropolitan areas.11 These areas also tend to be the costliest, and generally have large young and single professional populations, yet many renter-by-choice millennials pay a premium for a ‘live, work, play’ lifestyle with easy access to restaurants, cultural and recreational activities, and work.

Growing Popularity of the Sun Belt. Relatively less expensive cities in the Sun Belt have high domestic migration from both Millennials and older adults. These regions tend to have more low and mid-rise rental housing. Much of the future new household growth may be in the South and West.12 Several areas, such as Austin, Dallas, Atlanta, Denver, and South Florida, are experiencing faster-than-average employment and population growth.

The Rise of Single-Family Rental Homes. Less than one-third of rental households are living in detached, single-family homes; however, this segment has reported considerable growth (up by4 million since 2006).13 Recently, suburban household growth has picked up, offering the lure of larger living space, superior schools, and a better environment for older Millennials.

In select markets, we see a sizeable opportunity in these multifamily housing segments:

Class A in Largest & Most Expensive Metros. With the acute cost of housing in the largest and most expensive metros, there is an ongoing opportunity to develop and invest in Class A rentals in these markets. The ongoing savings crisis amongst younger adults is likely to sustain a large stream of demand for entry-level rental housing therein.

Apartment Buildings in Town Centers in Premier Suburbs & Edge Cities. As more Millennials age, we expect an even greater migration to premier suburbs and edge cities, as well as more demand for apartments in town centers throughout the outer limits of the most populous U.S. metros.

Renovate Well-Located B Apartments to Class A. Existing Class B properties in strong submarkets and path of growth neighborhoods are prime for redevelopment. There is a tremendous amount of aged inventory in urban downtowns and premier suburbs still in need of renovation.

Improve Mid- and Low-Cost Inventory. The vast majority of rental property serves mid-to-low income households. In contrast to the high-end market, affordable rental supply has not kept pace with demand. There is now a shortage, which has contributed to housing cost burdens. Lower availability of low-cost rentals has forced millions of lower- and middle-income households to spend an outsized share of income on housing. There is a large opportunity to provide better quality, moderately priced rental housing in densely populated areas.

Investment Outlook

Given the current U.S. socioeconomic environment, there is rising interest in high-quality rentals across all price points and regions. The composition of rental households is a broad cross-section of categories that will demand a well-diversified inventory. Baby Boomers, Millennials, and Gen Z will have many similar housing requirements; going forward, the primary differences will mainly be regional and related to proximity to central business districts (CBDs). Multifamily housing will likely thrive most in markets and submarkets where for-sale housing is prohibitively expensive.

Clarion Partners recommends an investment strategy targeting mainly professionally-managed, high-quality multifamily in and around both the largest and most expensive U.S. metropolitan areas. As rental demand remains robust, build-to-core and value-add approaches are expected to be attractive, especially in costly and high-growth metros and submarkets. We believe there is still a significant opportunity to improve the quality of the nation’s rental housing stock, as well as create more dynamic mixed-use living communities. The American dream of buying a home may prove challenging to many younger and middle-income households in urban areas. The growing renter cohort groups -- both renters by necessity and renters by choice -- should offer a steady tenant base for many years ahead.

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